Advisor Marketing After the “Year of the Ponzi Scheme”

The Wall Street Journal called 2009, “The Year of the Ponzi Scheme.”  Many people heard of the term “Ponzi Scheme” for the first time only because of the size of Bernard Madoff’s deal: $50 billion. Sadly with interest rates near zero, many retired people look at high returns delivered by such schemes and get sucked in with their life savings.

Someone commented on this with an article about a change in due dilegence. It suggests that financial advisors should investigate the ethics and integrity of the managers of recommended investments. Don’t just look at returns, look at WHO is generating those returns. Can this be done? Should you be held to this standard?

Time will tell if the Ponzi Schemes of 2009 lead to regulatory changes in 2010.

The Year of the Ponzi Scheme

If you weren’t familiar with the name “Ponzi” last year, you sure learned it quickly this year, along with the names “Madoff,” “Dreier,” “Petters,” and all the others who followed in the footsteps of the notorious fraudster Charles Ponzi.

That’s because, as the Associated Press reports, the number of Ponzi schemes that came to light in the U.S. has nearly quadrupled in the last year. The schemes, in which perpetrators lure investors with promises of high returns and use new investors’ cash to pay the old ones (and, of course, grab cash for themselves), topped 150 this year, compared to about 40 last year.

As a result, the AP says “tens of thousands of investors” lost more than $16.5 billion this year. That figure doesn’t include the $19.4 billion that Bernard Madoff is estimated to have bilked his investors out of in the largest Ponzi scheme ever, because Madoff was arrested in December 2008.

The AP’s review of federal and state criminal cases found that amid the recession and heightened public awareness of Ponzi schemes, the federal government stepped up its pursuit of suspected fraudsters. The Federal Bureau of Investigation launched more than 2,100 probes into securities fraud, up from last year’s 1,750 investigations, and it increased by one-third the number of agents working on high-yield investment fraud cases. And the Securities and Exchange Commission issued 82% more restraining orders and devoted more of its workload to investigating potential scams.



Dale Yeager a nationally known criminal analyst says that news coverage of the recent investor scandals is missing a critical aspect of these crimes. This overlooked issue is something Yeager calls the “Due Diligence Mess.”

Yeager, says the problem is the antiquated way due diligence is performed for investors.

“The financial crimes of the past year will continue to occur unless radical changes are made in the due diligence process,” states Yeager. “Due diligence must be performed as a criminal investigation not just a financial assessment.”

Based on his experience performing over 200 financial investigations, he believes that the focus must be on the ethics of the people operating the organization the investor will be placing their money into.

“Due diligence is about assessing a person’s credibility” states Yeager, “and people assessment has and always will be the domain of forensic psychology. Look at the amount of negative information that reporters have discovered about Madoff over the past few months. Information that provides a specific psychological profile of him, showing a lifelong pattern of narcissistic and unethical behavior.”

Yeager lays out a plan of action to prevent investor fraud with his article, “The Due Diligence Mess: 3 Reasons Why Ponzi Schemes and Investor Fraud Will Continue”.

“People have become accustom to using forensic accountants,” states Yeager. “But they need to become accustom to using that process in accessing behavior and personal ethics.

Advisor Marketing Goals for 2010

To get anywhere in life you need to know where you want to get to, you need a road map to show you the path to take and then you need to do the most important thing: Take the first step!

In this short video Richard encourages you to create a one page business plan using Jim Horan’s book, The One Page Business Plan. This is the best “first step” you can take for a successful 2010. You can read my review of this outstanding book here.


Happy New Year!

NY Times Editorial: “An Estate Tax Mess” and Your Clients

You need to keep your finger on what’s hot in the economy as well as in the political realm. Do you sense a growing wave of discontent with what the “political class” is doing to the middle and even upper classes these days? Wall St. gets a bailout and Main St. is left to fend for itself?

The failure of Congress to means that the super rich (maybe 5500 estates in the US) will benefit from the repeal of the estate tax for 2010. Congress’ failure also means that approximately 70,000 families will get hit by the repeal of the step-up in basis. As this word gets out on this, you’ll see editorials in your local paper like this one in yesterday’s New York Times.

You need to get up to speed on all of this and communicate what’s going on to your clients. Then you’ll be in a position to help your clients take evasive action appropriate steps to protect their estates. While you’re helping your upper end clients with this, don’t forget to ask them if they have friends who need similar advice. Maybe you can talk to them before their advisor gets up to speed.

An Estate Tax Mess

Published: December 27, 2009

For much of the last eight years, the majority Republicans pushed through tax break after tax break that mostly benefited the wealthy. Now in the majority, Democratic lawmakers have failed to stop yet another tax benefit for the richest of the rich from taking effect in 2010.

The tax in question is the estate tax, which President George W. Bush and Republicans and some Democrats in Congress were determined to cut from the day Mr. Bush took office in 2001. Even then, the tax hit only a tiny portion of Americans, but estate-tax foes sold Americans a myth about a “death tax” that prevented average people from passing on hard-earned money.

The result was a measure that made big reductions in the federal estate tax, phased in through 2009, and then repealed the tax, for one year only, in 2010. After that, the tax is to be reinstated at pre-2001 levels. Writing the law in that convoluted way helped to mask the true costs. It also created an untenable situation in which a one-year repeal is followed by reinstatement.

There was a giant catch, as well. In 2010, the one-year repeal of the estate tax is coupled with a new tax that will hit smaller estates. That tax could affect up to an estimated 70,000 estates next year, compared with the current estate tax law, which applies to about 5,500 estates annually. If that sounds wacky, it is. It would also be harmful to many small family businesses, precisely the group that estate-tax cutters say they want to help.

Today, the estate tax applies to estates that are worth more than $7 million (for couples), or $3.5 million (for individuals). More than 99 percent of all estates are exempt, so there is no reason to reduce or repeal the tax.

In addition, under today’s law, when heirs sell inherited property, no capital gains tax is due on the increase in value that occurred during the lifetime of the original owner. (If your parents pass on stock worth $2 million that they bought for $200,000, and you sell it for $2 million, you owe no tax on the $1.8 million gain.)

But when the estate tax is repealed in 2010, the capital gains tax will kick in once the gains in an estate exceed $1.3 million. There’s an extra $3 million exemption for assets left to a spouse.

The bottom line is this: there will be many more losers than winners under estate-tax repeal, and the losers will be among Americans who are farther down the wealth ladder.

Earlier this month, the House voted to continue the estate tax permanently as it is this year, with its more-than-generous exemptions and no tax on the sale of inherited assets.

The Senate has failed to act. Republicans refused to consider the House bill or even a two-month delay to allow time for debate. Democrats correctly refused to consider a proposal to increase the exemption to $10 million for couples and $5 million for individuals, an unconscionable giveaway to the wealthy at a time when ordinary Americans are suffering. Compared with keeping the 2009 law, it would cost $250 billion more over 10 years.

Democratic Senate leaders have said that in 2010, they will seek to restore retroactively the 2009 estate tax rules. Fairness, progressivity and the need for revenue demand just that. But failure to act in a timely way is a disturbing display of intransigence and failed leadership. That bodes ill for the more daunting tax debates next year, when the rest of the Bush tax cuts are set to expire.

American taxpayers need — and deserve — better.

Not Just Estate Tax Expiring at Year End

1054259-us-capitol-dome[Richard: The debate over healthcare reform has sucked all the air out of Washington DC. Not just the hot air…the result has been over 50 tax breaks for business and individuals will now expire on December 31st. Get ready for lots of questions from your clients.]

Congress Lets 50 Tax Breaks Expire
Ashlea Ebeling, 12.22.09, 3:00 PM ET

When members of the U.S. Senate finally head home this week, they will be leaving the future of 50 individual and business tax breaks in limbo. All expire at the end of 2009.

Among the disappearing breaks are the research tax credit and an annual alternative minimum tax “patch,” which keeps 23 million additional middle-income Americans from being forced into calculating and paying the dreaded AMT. (For 2009, with the patch in place, 4 million upper-middle- and high-income families will pay AMT.)

Most of the fading-out-50 can, and likely will, be reauthorized retroactively, creating an inconvenience for some taxpayers, but not the same sort of mess as Congress’ failure to resolve the future of the estate tax. The estate tax will expire at the close of Dec. 31 and Democrats are pledging to resurrect it retroactively, leading to all sorts of potential legal problems, as well as some planning opportunities for wealthy families.

Among the expiring individual tax breaks: the deduction for state and local sales taxes for itemizers (which benefits mainly residents of states that don’t impose an income tax); the additional $1,000 deduction for real estate taxes for those who claim the standard deduction; the $4,000 deduction for college tuition; and a special $250 deduction for teachers who spend their own money on classroom supplies.

This isn’t the first time Congress has let some of the 50 breaks lapse. In fact, expiring provisions have come to be known as “extenders,” because instead of eliminating them or making them permanent and recognizing their true costs, Congress simply extends them year by year.

This time around, on Dec. 9, House Democrats pushed through a bill extending most of the breaks at a cost of $31 billion. The Senate, mired in partisan warfare over health care reform, never took up a similar measure. On Tuesday, Senate Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Charles Grassley, R-Iowa, issued a joint letter promising to extend the provisions retroactively as soon as possible.

But taxpayers can’t count on early action. “We’ve seen this movie before,” sighs Clint Stretch, managing principal of tax policy with Deloitte Tax. “When this has happened in the past, it’s been literally months before Congress has gotten around to fixing things.” For example, Congress finally included dozens of lapsed tax breaks in the October 2008 bank bailout, making them retroactive to Jan. 1, 2008.

Meanwhile, taxpayers have some decisions to make. For example, if the AMT patch isn’t passed by the time their first 2010 estimated tax payments are due in April, they’ll have to decide whether to pay extra money or risk underpaying and incurring a penalty. One lapsed provision allows taxpayers age 70-and-a-half or older to transfer up to $100,000 directly from an IRA to charity without booking the amount transferred as income. Older folks planning a charitable gift may want to do this before Jan. 1.

For businesses, the lapsing of the R&D credit–a $7 billion a year break–is a particular problem, since companies must plan for long-term research commitments amid uncertainty. Since its enactment in 1981, the credit has been extended 13 times; in the mid-1990s there was a one-year gap when it wasn’t extended retroactively.


The House extenders bill passed Dec. 9 didn’t include the AMT patch. Stretch says it’s likely the AMT patch and the traditional extenders, including the research credit, will be extended for 2010 sometime next year. Still, with the budget deficit growing, the Bush-era tax cuts set to expire at the end of 2010, and economic advisers to Obama looking at options for tax reform, nothing is certain.

“Who knows what’s going to happen next year?” asks McGuire.

Clock Ticks On Estate Tax

[Richard: Read this update on the non-extension of the federal estate tax. There is some confusion out there: while the House did vote to extend the 2009 rates/exemptions into 2010 and beyond, the Senate didn’t get to it. Read this article for the implications of this non-action.] Jones)
As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.

Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that’s just one of the troubling aspects of a repeal.

There are also serious questions about how families with ailing relatives would be affected–a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago.

Anyone who turns to a professional for help with all of this is likely to find advisers still sorting through the answers. A big question is whether Congress will enact a retroactive tax, and how it would play out.

Catherine G. Schmidt, an estate-planning attorney and partner at the law firm Patterson Belknap Webb & Tyler LLP in New York, says her firm is working in what could be a narrow window to help clients take advantage of the repeal and avoid a retroactive tax. But, she adds, strategies to this end “are not something anybody already has in their pockets.”

Indeed, most advisors truly believed Congress would never let it come to this.

“The estate-planning community is astounded that we’ve reached this point,” said Schmidt.

Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011. President Barack Obama blocked a short-term extension Wednesday, but Senate Finance Committee Chairman Max Baucus (D., Mont.) said he will try to move legislation early in 2010 that ensures there won’t be a window where wealthy estate owners who die will escape the tax.

For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. The step-up values inherited assets for tax purposes at what they were worth when the person who bequeathed them died. Starting January 1, though, assets will be valued at the original cost of the asset.

So, at a relative’s death, “families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person’s lifetime,” said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.

Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.

If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.

As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period–after the end of the year but before a new tax is enacted–would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.

Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. The high court, in fact, has been upholding retroactive tax increases since as long ago as 1874.

Advisor Marketing with Christmas Cards

In this short video, Richard Emmons explains how sending holiday cards to your clients and prospects can keep your existing clients happy and help you stand out from your competitors. You’ll also learn what to do if you’ve run out of time and it’s too late to send out Christmas cards.


Learning From Harvard’s Investment Mistakes

Article: Harvard Swaps Are So Toxic Even Summers Won’t Explain

harvard-logoFinancial advisors can learn a lot about what “not to do” by studying this article on Bloomberg today.

I’ll summarize what happened and then provide some commentary along with some choice quotes.

  • Harvard planned a major campus expansion and wanted to lock in low interest rates 4 years before they needed the money
  • Harvard invested in “forward swaps” to lock in “low interest rates” for the project’s financing.
  • These investments bets assumed that interest rates would rise from the existing 2.25% level.
  • The Federal Reserve Bank subsequently cut short term rates to .26%.
  • The value of the swaps went to a negative $460MM by June 2005 as rates rose. Lesson: Understand your downside risk.
  • During the meltdown in 2008, Harvard “cuts its losses” on its swap investments by paying over $1 billion to various banks including JPMorgan, Goldman Sachs, Morgan Stanley, and Bank of America. $500 million up front and the rest paid over 40 years.
  • “December 2008 was, by an enormous amount, the worst time in history” to terminate the swaps by borrowing money, said Peter Shapiro, a swap adviser at Swap Financial Group.
  • This turned out to be the bottom of the market. Oops. “Concerned that its losses might worsen, the school borrowed money to terminate the swaps at the nadir of their value, only to see the market for such agreements begin to recover weeks later.”

Apparently none of these investment notables had read about Ray Lucia’s “Buckets of Money” strategy:

Making matters worse, Harvard disclosed Oct. 16 that its checkbook fund, the general operating account, lost $1.8 billion in the year ended June 30. Lumping the cash account with the endowment was risky, said Louis Morrell, who managed the endowment for Radcliffe College, which is part of Harvard, until 1990.

“They put the operating funds in the endowment –it’s like the guy who has his retirement income in company stock,” said Morrell, who is also the former treasurer of Wake Forest University in Winston-Salem, North Carolina.

This last move meant that Harvard’s operating account fell by $1.8 billion in just one year. So they had to scramble to raise cash.

As vanishing credit spurred the government-led rescue of dozens of financial institutions, Harvard was so strapped for cash that it asked Massachusetts for fast-track approval to borrow $2.5 billion. Almost $500 million was used within days to exit agreements known as interest-rate swaps that Harvard had entered to finance expansion in Allston, across the Charles River from its main campus in Cambridge, Massachusetts.

Lesson here would be don’t invest cash needed for day-to-day expenses.

Harvard Corp. had a 7-member ruling body approve the transactions. This committee included some well-known figures:

  • Lawrence Summers,  former Secretary for President Clinton, then Harvard President, now serves as President Obama’s Economic Advisor
  • James Rothenberg, his Los Angeles-based company, Capital Group, operates American Funds
  • Robert Rubin, former U.S. Treasury Secretary and Summers’s previous boss and predecessor at the U.S. Treasury
  • Robert D. Reischauer, former director of the Congressional Budget Office.

Lesson here is don’t be swayed by celebrity endorsements.

Other smaller colleges seem to be learning from Harvard’s mistakes:

Harvard’s woes stemmed from misunderstanding its role, said Leon Botstein, president of Bard College in Annandale-on-Hudson, New York.

“We shouldn’t be in the banking business, we should be in the education business,” Botstein said in a telephone interview.

Another lesson is don’t depend on regulators to protect investors:

Summers, along with Rubin and Greenspan opposed the U.S. Commodity Futures Trading Commission’s attempt in 1998 to regulate so-called over-the- counter derivatives, which included agreements like interest rate swaps. At the time, Summers was Rubin’s deputy secretary.

Now Summers is leading the Obama administration’s effort to write stricter rules for the derivatives market “to protect the American people,” he said in October at a conference in New York sponsored by The Economist magazine.

Better late than never I guess.

The article pointed out Summers was forced to resign as Harvard’s president “after he questioned women’s innate aptitude for math and science.” I bet few American housewives would look to forward swaps when the family plans to build a larger home in 4 years.

In fact, I bet most American housewives would question the wisdom of Harvard borrowing money to build buildings when it had $22.6 billion in its endowment. Some 4-year colleges, like Grove City College, don’t build any buildings until they’ve raised the necessary funds and  have the money in the bank. Being debt free, Grove City College has tuition less than half of Harvard University. There’s gotta be a lesson in there someplace.

A final lesson: People shouldn’t invest on the basis of what rich and famous people are doing:

“You can be very big and very rich and very smart and still get things wrong,” Shapiro said.


Marketing Success with “Free” Products

Free-Chris-Anderson-300x300In this short video, I review Chris Anderson’s new book: “Free: The Future of a Radical Price.”

Author Chris Anderson makes the case that businesses can often raise profits by giving away quality content.

Financial advisors and other professionals can atract quality prospects by giving away valuable content to qualified prospects. This can be through free reports, community seminars, and articles.

Just remember that your TIME is limited and there are only so many hours in a day.

You can give away lots of free products, such as free reports, and use very little time each day. Free info on your website takes ZERO hours per day once it is set up. Dropping a free written reports takes only a few minutes to write out the address and apply a stamp.

However, when you give away your time, you should try to talk to lots of people at the same time. You can do this by hosting community seminars and speaking on radio shows.

Advisor Productivity Tool: Dragon Dictate for the iPhone

Dragon_iPhoneI written before about how you can move toward a paperless office by dictating your client meeting notes.

Why write down some chicken scratch manual notes when you can speak for several minutes and get an email of transcribed notes?

One reason has been cost. Some dictation services cost $50 to $80 per month and limit how long you can talk.

Well for all you iPhone users out there, you now have a wonderful option. The Dragon app for your iPhone.

At least for now, you can download this app from iTunes and get it for free.

Watch this short video to see how it works.


Seems too good to be true, eh? Well I read about one caveat on this software.

The software has over 95% accuracy. One trick it uses to achieve high accuracy is to upload the names in your contact list. Not email addresses or phone numbers or anything else. Otherwise it would need to look up names against its entire dictionary of names.

You can read a bit more about this issue here:

Here’s a quote from this article which speaks to the security of the transcribed messages:

Since your dictation goes out over the internet for processing, I asked Nuance about security. Their reply was as follows:

“Search queries and dictation requests are transcribed by fully automated speech recognition software, without the use of humans. Data is uploaded and collected in order to improve performance for individual users, and to improve the general performance of the system.

All speech recognition requests and associated data are processed in data centers in the U.S. that meet stringent security and privacy standards; these are the same standards that we use for processing private information in other areas of our business.”

Of course, I’d have to borrow my daughter’s iPhone to try this out myself. If you get it, leave some comments below to tell how it worked out.

Advisor Marketing Mindset and Ice Storms

icy-roadWe live in the mountains of Southern Oregon about 7 miles north of our town, Grants Pass. There are generally 5 or 10 days a year when we wished we had 4 wheel drive.

Friday night was one of them. Ice storms during the week had caused thousands of homes to be without power. We’d been among them.

I’d just returned from week long business trip and wanted to take the family out to a highly recommended movie: The Blind Side.

Despite some misgivings about the roads, we headed out and got there without a problem. The movie was a winner and definitely worth seeing now rather than waiting for it to hit the rental stores. All we had left was the drive home. Easier said than done.

My decisions and the icy roads combined to add over 12 hours to our ride home.

Let me tell you some of the marketing lessons from all of this.

When we were just 15 minutes from home, the back of our van started fishtailing and I had no traction.

The problem was “black ice” which is clear ice over black pavement. Hard to see. Very difficult to drive upon.

So I took the do-it-yourself approach and spent 30 minutes putting on snow chains. Problem solved? Not exactly.

You guys from Alaska, Maine, and Minnesota must be telling yourselves, “What was he thinking?”

Well, I was thinking it would help me reach my destination. Kind of like an investor doing his own retirement planning. He knows his goal, getting enough money to retire on, but choosing the wrong tool will doom his retirement.

In my case, choosing the wrong tool, snow chains, allowed me to go another 100 yards up the hill. Unfortunately, going down hill I had no way to steer the van and was fortunately to get to the side of the road without landing in the ditch.

Now it was time to call in the professionals. I called the roadside assistance company.

Sadly, all I could get was an automated message telling me that their agents were busy and that it would take at least 4 hours to get service to our area.

At the time we needed their help most, we couldn’t talk to a live human being. No, this wasn’t AAA, we’d switched a few years ago to a different company to save some money.

Marketing lesson #1: Cheaper isn’t always the deal it seems to be. Don’t be afraid to charge higher fees if you’re worth it.

Marketing lesson #2: Try to give your clients the ability to speak to a real human being. One of my advisor clients had a tradition of ALWAYS answering the telephone with a live person. No answering machines, no voice mail, no auto-attendant. When the office was closed (and at lunch time), their phone was answered by an answering service. The planner or someone on staff could be tracked down 24/7/365. Think about how this sets them apart.

At this point, we had 2 choices: walk six miles home over icy roads or 1 mile back to town and stay with friends.

Some of us saw this as an adventure and were clearly in shape enough to walk six miles in the dark at 12:30 at night. Others weren’t so sure.

This is when my “marketing mindset” kicked in.

I imagined the front page of our local paper. Worst case: “Family perishes trying to walk 6 miles through ice storm.” Better case: “Family suffers frostbite attempting nighttime 1/4 marathon over icy roads.”

Neither would reflect very good judgment on my part. My “marketing mindset” told me that going back to town was the way to go.

So we called our pastor at 12:30 and told his wife of our plight. We said we’d call back once we were in town because we didn’t want them to get stuck as well.

And at 1:30 a.m. we got picked up somewhat tired, cold and damp. Within minutes we got to their home for a few laughs and some hot tea.

The next day we were able to pick up our van and get home to our pets. I clocked the mileage and got a pleasant surprise:

The six of us actually walked 2.5 miles getting back to town…2.5 mph was a pretty good pace considering the conditions.

And we didn’t make the front page of the newspaper either. Trust me when I tell you of the necessity of developing a marketing mindset!